Jim Rickards

Part of a currency war is seeing the U.S. dollar going down and other currencies going up, or the U.S. dollar going up while other currencies go down.

This can seesaw back and forth without a logical conclusion.

In Currency Wars, which came out in 2011, Jim said that a currency war can go on for fifteen years. It’s no surprise that it’s now late 2014, and newspapers are full of stories about currency wars.

This is not new — it’s the same currency war that started in 2010.

World War II lasted about six years but it wasn’t all fighting all the time. There were quiet periods and then big battles. We’re in one of those big battles right now between the euro and the U.S. dollar.

Expect this to continue and to be part of the investment landscape.

U.S. DOLLAR STRONG

The U.S. dollar is going through a period of great strength and is up 8% in the last six months — that’s huge but it’s unsustainable.

It’s the worst possible thing that could happen to the United States — a strong dollar is Janet Yellen’s worst nightmare.

The FED has said over and over that they want inflation — a 2% inflation rate long term and a 2.5% short term target.

A strong dollar is deflationary and lowers the cost of imports. That feeds through the supply chain and lowers costs overall.

The U.S. economy is weak overall and now the FED will pull in the lifeline that was extended to the euro and yen, which allowed them both to weaken.

The FED will not be raising interest rates in 2015.

Also, QE4 will not be surprising to see at all.

Look for the U.S. dollar to go down, the euro to go up and gold to go up. This will not happen right away. It will probably be in the next six month or so as it plays out.

RUSSIA

Russia began dumping U.S. treasuries in October 2013, probably in preparation for their move into Crimea.

Belgium began buying those treasuries. Who really bought them? Clearly not the government or people of Belgium — it’s some international actor. It could possibly be the FED, or ECB or China, but no matter who it is, the fact is that the FED is still the main player.

QE AND TAPERING

The FED ended QE1 (a 100% taper), they ended QE2 (a 100% taper), and now they are ending QE3 with a taper. We know from QE1 and QE2 that they both failed — the stock market went sideways and the economy stalled — meaning the FED had to print more.

Tapering failed for QE1 and QE2, and nothing is different this time. QE3 will also fail and the FED will have to keep printing money.

Don’t be surprised if stocks rally if they announce QE4 in April or May of 2015. It just means a bigger asset bubble and a bigger collapse down the road.

CHINA AND WORLD RESERVE CURRENCIES

China isn’t anywhere close to having a world reserve currency. They may want it eventually, but they don’t meet any of the criteria.

Everything China is doing right now is done to promote their currency as a trade currency, not a reserve currency. The bilateral swap deal you see with Brazil is just designed to improve the liquidity of the yuan.

Their liquidity is improving quickly and the yuan is expanding as a trade currency.

Reserves are just a savings account for a country.

China has $4 trillion in their reserves and they can’t just stick it under a mattress — they have to buy something with it.

The only market big enough is U.S. treasuries.

Sixty percent of the world reserves are in U.S. treasuries.

CHINA AND SDRs

China wants to have their cake and eat it too.

They want to be a kind of reserve currency without setting up the infrastructure needed to qualify.

The IMF’s Special Drawing Rights (SDRs) is going to replace the U.S. dollar as the world reserve currency.

China is trying to be a reserve currency through the back door, by being included in the basket of currencies that make up the SDR.

If you look at that basket today, listed on the IMF website, it’s the U.S. dollar, the euro, the yen, Swiss francs, British sterling and perhaps a couple of others.

They are all traditional hard currencies and the Chinese yuan is not included.

The IMF board can change the composition of the basket and they could include the yuan, and those discussions are happening behind closed doors as we speak.

The U.S. is standing in the way of the yuan being included in the basket, and there’s all kinds of pushing and shoving right now. For example, China wants more votes in the IMF and the U.S. is standing in the way.

The IMF is a mess right now because of this fighting.

The SDR will become the new world reserve currency. The next time there’s a global liquidity crisis it’s going to be bigger than the Central Banks and the IMF will print SDRs.

China wants to be part of that party.

RUSSIA AND CYBER WARFARE

The U.S. has imposed sanctions on Russia as a result of their actions in Crimea and the Ukraine, and Russia is retaliating.

Since the U.S. dollar is 60% of world reserves, if the U.S. manipulates the interest rate then they can manipulate the world.

We’ve seen LIBOR manipulation, gold price manipulation, foreign exchange manipulation and energy manipulation. Point to a market that isn’t manipulated by either governments or bad actors, frauds or crooks — Jim can’t think of one.

What is more dangerous than government manipulation is financial warfare — not going into markets for financial advantage, but for geopolitical advantage — to destroy the wealth of others as opposed to building your own wealth.

That’s what’s going on behind the scenes.

MUTUALLY ASSURED FINANCIAL DESTRUCTION

During the cold war we had mutually assured destruction.

That meant that the U.S. had enough weapons to wipe out the Soviet Union, and they had enough to wipe out the U.S.

This means “You wipe out the other guy before they can retaliate — and you win”.

This led to the arms race — the race to have enough weapons to retaliate and wipe the attacker out.

Now we have mutually assured financial destruction.

As the U.S. uses the dollar to intimidate trading partners, the partners now have the power to strike back – using cyber warfare aka asymetrical warfare. The Russians are the best at this.

This cyber warfare leads to the risk of an accident, or a rogue officer in the chain of command.

Someone could accidentally shut down the markets.

It’s entirely possible.

GOLD, FINE ART AND LAND

That’s the reason for investors to have some of their wealth in a non-digital form. That would mean physical gold, physical silver, fine art, land — something that can’t be wiped out by digital warfare or frozen by the government.